How to apply a lower rate of Corporation Tax to profits earned from patented inventions and certain other innovations.
The Patent Box enables companies to apply a lower rate of Corporation Tax to profits earned after 1 April 2013 from its patented inventions. The relief will be phased in from 1 April 2013 and the lower rate of Corporation Tax to be applied will be 10%.
This guidance only refers to patents but your company may also benefit from the Patent Box if it holds certain other medicinal or botanic innovation rights.
Who can benefit
You can only benefit from the Patent Box if your company is liable to Corporation Tax and makes a profit from exploiting patented inventions.
If your company is a member of a group, it may qualify if another company in the group has undertaken the qualifying development.
Which patents are eligible and what must be done with them
You can benefit from the Patent Box if your company owns or exclusively licenses-in patents granted by the:
- UK Intellectual Property Office
- European Patent Office
- following countries in the European Economic Area:
- Czech Republic
Your company or another group company must also have undertaken qualifying development for the patent by making a significant contribution to either:
- the creation or development of the patented invention
- a product incorporating the patented invention
Groups of companies
If your company is a member of a group, it must also actively own the patented invention by taking a significant role in managing its whole portfolio of eligible patents.
Your company doesn’t have to make all the decisions regarding the portfolio, but it must undertake a significant amount of the management.
Exclusively licensing-in patents
Patent holders may wish to license their inventions for others to develop. If your company holds licenses to use others’ technology it may still be able to benefit from the Patent Box. But to do so it must meet all of the following conditions.
It must have:
- rights to develop, exploit and defend rights in the patented invention
- one or more rights to the exclusion of all other persons (including the licensor)
- exclusivity throughout at least an entire national territory - rights to manufacture or sell within part of a country, for example, would not qualify as exclusive
Also, the licensee must either be able to bring infringement proceedings to defend its rights or be entitled to most of the damages awarded in successful proceedings relating to its rights.
The exclusive licensing conditions are relaxed for groups of companies. This recognises that one company in the group may own a portfolio of patents while another exploits them.
Income earned from exploiting patented inventions
Not all of your company profits may come from exploiting patented inventions. To be relevant IP (intellectual property) income, it must come from at least one of the following:
- selling patented products - that is sales of the patented product or products incorporating the patented invention or bespoke spare parts
- licensing out patent rights
- selling patented rights
- infringement income
- damages, insurance or other compensation related to patent rights
Your company can also benefit from the Patent Box if it uses a manufacturing process that is patented or provides a service using a patented tool. In these circumstances, you will need to calculate a notional royalty.
How and when to claim
You have to make an election to benefit from the reduced rate of Corporation Tax that applies to the Patent Box. You can do this in the computations accompanying your Company Tax Return or separately in writing. There is no special form of words for this election. You must make your election within 2 years after the end of the accounting period in which the relevant profits and income arose.
The full benefit of the regime will be phased in from 1 April 2013. You will need to apply an appropriate percentage to the profits your company earns from its patented inventions.
The appropriate percentages for each financial year are:
- 1 April 2013 to 31 March 2014: 60%
- 1 April 2014 to 31 March 2015: 70%
- 1 April 2015 to 31 March 2016: 80%
- 1 April 2016 to 31 March 2017: 90%
- from 1 April 2017: 100%
There is no box on the Company Tax Return for making the election. Instead you apply the reduced 10% rate by subtracting an additional trading deduction from your Corporation Tax profits. This is calculated using the following formula:
RP × FY% × ((MR - IPR) ÷ MR)
In the formula:
- RP is the profits of a company’s trade relevant to Patent Box
- FY% is the appropriate percentage for each financial year
- MR is the main rate of Corporation Tax
- IPR is the reduced rate of 10%
This approach is used to avoid complications if you claim losses or other reliefs. So before you can calculate the deduction, you must calculate the amount of your profits that qualify for Patent Box.
If a company has trade Corporation Tax profits of £1,000 in the financial year from 1 April 2015, which qualify in full for the Patent Box, and the main rate of tax is 22%, then instead of arriving at a tax charge of £100 by multiplying £1000 by 10%, the calculation is:
|Profits chargeable to Corporation Tax||£1,000|
|Patent Box deduction = £1000 × 80% ((22 - 10) ÷ 22)||£436|
|Profits chargeable to Corporation Tax||£564|
|Tax payable = £564 × 22%||£124|
Where your company’s accounting period falls within more than one financial year you will need to apportion the profits your company earns from its patented inventions in that accounting period to each financial year.
For example, a company has trade Corporation Tax profits of £1,000 in the year ended 31 December 2016 which qualify in full for the Patent Box, the profits are apportioned as follows:
Profits falling in financial year 2015 (1 January 2016 to 31 March 2016) 91/366 × £1,000 = £249 Profits falling in financial year 2016 (1 April 2016 to 31 December 2016) 275/366 × £1,000 = £751
|Profits chargeable to Corporation Tax||£1,000|
|Patent Box deduction = (£249 × 80% + £751 x 90%) × ((22 - 10) ÷ 22)||£478|
|Profits chargeable to Corporation Tax||£522|
|Tax payable = £522 × 22%||£114|
Answers to your Patent Box questions
There are specialist R&D Relief units located throughout the UK who are able to assist you with your claim. These units are organised on a geographical basis, dealing with claims from companies whose main research and development base is within their postcode allocation. These units will also answer your Patent Box questions. You can contact them before making a claim or while you are putting together your claim.
In addition, HM Revenue and Customs (HMRC) has a free pre-recorded ‘webinar’ that provides a basic overview and introduction to R&D tax credits and the Patent Box, and explains who is eligible to claim, how to make a claim and where to get further help and advice for your business.
But if your company’s tax affairs are handled by a Customer Relationship Manager or Customer Coordinator in the HMRC Large Business Service or in the Large and Complex teams, you should contact your Large Business Service or Large and Complex office direct.